(Corrects Feb. 20 story to remove incorrect reference to sale
of loans by Varde and Oakhill)

By Jonathan Saul and Maiya Keidan

LONDON, Feb 20 (Reuters) - A growing number of hedge funds
are moving into shipping debt, an asset class few have invested
in before, looking to buy up loans and bonds as banks cut their
exposure to the troubled sector.

World economy worries and cost pressures are dampening
prospects for a proper recovery in many segments of the shipping
sector, which has struggled with tough markets for a decade.

Meanwhile European banks, particularly German lenders, are
trying to offload distressed and performing loans to the
industry which attracts high capital requirements.

The European Central Bank's banking supervisor has flagged
troubled non-performing loans in 2019 as "a concern for a
significant number of euro area institutions".

Hedge funds clocked up hundreds of millions of dollars in
losses from investments in mainly equities when the shipping
industry first turned sour a decade ago – and have made limited
forays for the most part since.

Last year some equity-focused funds bet on a recovery for
the global shipping industry through the stock and futures
markets but many are now retrenching after heavy losses in the
fourth quarter.

Debt-focused funds are hoping for more luck.

"There is more hedge fund buying interest in shipping debt
than in equity now. I don't think anyone believes the (shipping)
market will recover any time soon," said Basil Karatzas of New
York based shipping finance advisory firm Karatzas Marine
Advisors & Co.

"So, if you buy equities the upside potential is limited.
You can more easily make double-digit returns through credit
risk investments."

A spokesman for York Capital declined to comment, while
Cross Ocean Partners did not respond to requests for comment.

One deal expected to generate hedge fund interest include a
portfolio of distressed shipping loans that Greece's Piraeus
Bank is seeking to sell, finance sources said.

A source close to the Piraeus Bank deal said the portfolio
of shipping loans, called Nemo, was made up of non-performing
and performing loans with a nominal value of 500 million to 600
million euros. The source said a sale was expected to close in
the second quarter of 2019, declining to provide any details on
potential bidders.

Och-Ziff Capital Management was amongst the suitors
for a 2.7 billion euro distressed portfolio of shipping loans
that was sold this month by ailing German state bank NordLB,
which sources said was bought by private equity firm Cerberus.

Och-Ziff did not respond to requests for comment.

NordLB plans to wind down its remaining non-performing
shipping loan portfolio of nearly 4 billion euros almost
completely by the end of the year, which sources said is still
likely to involve some loan sell-offs and expected to generate
hedge fund interest.

Germany's No.2 lender DZ Bank is also trying to offload over
one billion euros of toxic shipping loans from its troubled
transport financing division DVB Bank, although there have been
multiple delays with the sales process, finance sources said.

Others though have opted for other types of investments,
viewing toxic debt as too risky now.

"Hedge funds need to step in to shipping but it's a bit
early for the distressed cycle. It's a question of timing," said
Louis Gargour, chief investment officer at hedge fund firm LNG
Capital, which has around 10 to 15 percent of its total exposure
focused on bond issuances by shipping companies.
(Additional reporting by George Georgiopoulos in Athens;
editing by David Evans)

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